Caribbean & Central America - April 2021

Panama’s President Laurentino Cortizo and his government are sailing in choppy waters as international credit ratings agencies, Moody’s Investors Service and Fitch Ratings, both downgrade the country, and the private sector lobby raises concerns over the handling of the economy in response to the coronavirus (Covid-19) pandemic.

On 18 March Moody’s downgraded Panama’s Long-term Issuer and Senior Unsecured Debt ratings to ‘Baa2’ from ‘Baa1’. It cited as the key driver for its decision, “the very material deterioration in Panama’s fiscal strength driven by the severe economic shock” from pandemic. According to Moody’s “while most sovereigns have experienced some diminution in their fiscal strength, in Panama’s case the erosion has been unusually large relative to rating peers”.

Moody’s, which expects Panama’s economic recovery to be gradual (see sidebar), also highlighted that the country’s GDP fell 17.9% in 2020 compared with its expectation of a 10% contraction in October 2020. This was the biggest contraction in the whole of Central America. Meanwhile the sharp slowdown in economic activity weighed on government revenue, which fell 21.2% last year. The fiscal deficit reached 10.1% of GDP, up from 3.1% in 2019 while at US$37bn, government debt stood at 69.8% of GDP in 2020, up from 46.4% in 2019. Moody’s downgrade came the month after Fitch downgraded Panama's Long-Term Foreign Currency Issuer Default Rating (IDR) from ‘BBB’ to ‘BBB’, citing the economic impact of the pandemic. In a 3 February statement Fitch also outlined the worsening fiscal situation.

Further echoing these concerns, on 4 March Amauri Castillo, the head of Panama’s banking superintendence (SBP) heaped more pressure on the government to address the fiscal situation by highlighting the need for Panama to retain its investment grade rating. Castillo also urged the need to comply with the action plan agreed with the Organisation for Economic Co-operation and Development Financial Action Task Force (FATF), which includes Panama on its ‘grey list’ of countries considered non-cooperative in the global fight against money laundering and terrorist financing, in order to improve competitivity.

Even prior to credit rating downgrades, Panama’s leading private sector lobby, the Cámara de Comercio, Industrias y Agricultura de Panamá (CCIAP), complained about the government’s handling of the economy. In a 31 January statement, it bemoaned a “grave economic crisis” which has driven up unemployment from 7.1% in 2019 to 18.5% in 2020, the highest rate in 20 years. CCIAP also more generally raised concerns over competitivity, warning that Panama has been in “free-fall” in the World Bank’s Ease of Doing Business indicator, ranking 86th out of 190 countries in 2020, down from 55th in 2014. It similarly complains that Panama has plummeted in the World Economic Forum’s Global Competitiveness Report, to 66th out of 141 countries in 2019, down from 40th six years earlier.

President Cortizo faces the same pressures as other world leaders in balancing public health with the economy during the pandemic but cannot blame sliding competitiveness or the inclusion in the FATF’s grey list on the coronavirus. That said, his government is taking action to kickstart the economy. Among other measures, on 19 March, the government announced that various ministries were working together to speed up the approval process for the building of export plants in order to boost exports; while on 5 April he sanctioned a new law which creates a national authority to attract investment and promote Panama’s exports (ProPanamá).

• Gradual recovery

Moody’s considers that improvements on the fiscal front will be at best “very gradual” given its expectation that the government deficit will remain relatively large at around 7.5% of GDP in 2021; and that economic output will not return to pre-pandemic levels until late 2023.